Prevailing conditions

Executives of the top private companies in the state
discuss economic forces affecting their businesses.
By Frank Maley

Earlier this year, Perfect Fit Industries Inc. went shopping, hoping to refinance its debt. The Charlotte bedding maker worried about the struggles of its primary lender and wanted to reduce costs. But it couldn’t get a package it liked from anybody else. “With all the uncertainty, they weren’t willing to give decent commitments,” says David Kennedy, chief operating officer. “A lot of banks weren’t taking on new customers.”

So Perfect Fit stood pat on its financing and kept producing mattress pads, pillows and electric blankets — hoping things would pick up. And bit by bit, they have. Demand is growing, its main lender got a fresh infusion of capital, and others are showing more interest in luring new customers. But financing remains a concern for Perfect Fit and many other companies around the state, according to a survey by Grant Thornton.

More than a sixth of those on the accounting firm’s North Carolina 100, a voluntary annual ranking of the state’s top-grossing private companies, say the cost or availability of financing is the biggest constraint on their growth. Banks have less money to lend, and some have struggled with higher-than-usual loan losses, so they’re being more careful about how they use it, says Scott Davis, who oversees Grant Thornton’s corporate advisory and restructuring services for the Southeast.

Restrictions found in lending covenants are tougher, and banks are less forgiving of violations. “As companies try to refinance, it’s getting to be very difficult,” Davis says. “The banks are getting much more serious about making it a bigger issue — everything from charging much higher fees to get through those covenant problems to increasing the interest rates to threatening to pull their financing.”

The biggest constraint on expansion, according to North Carolina 100 executives, is a basic one: lack of demand for their goods and services. Nearly 40% of companies on this year’s list say so. But for some, shrinking demand has its roots in a tighter credit market.

Raleigh-based Clancy & Theys Construction Co. will celebrate its 60th anniversary early next year. Traditionally, it has made its money erecting commercial buildings but lately has taken more public-sector work because that’s what’s available. Right now, it’s busy, but Vice President Scott Cutler worries about what’s ahead. “It looks like the brakes are fully on the economy, so the backlog that we’re going to work off in the next year is going to be much harder to replace.” That expected shortage of work stems, in large part, from the difficulty Clancy & Theys customers have had getting financing for projects and the increased equity demanded by lenders, Cutler says. “The market feels a little sour, and we’re seeing projects we hope will get started, but they’re not because of those conditions.”

The dearth of affordable credit seems to be on the minds of manufacturers more than executives in other sectors. More than a third of manufacturers on Grant Thornton’s North Carolina 100 consider it the main obstacle to growth. As collateral, lenders often consider inventory riskier than accounts receivable, Kennedy says. “A lot of times, it takes longer to turn that inventory into cash than it would receivables. Bankers are like everybody else. They want to make a quick buck and turn stuff quicker these days.”

Perfect Fit faces an additional hurdle because it is part of the declining textile-and-apparel industry, Kennedy says. “A lot of lenders will tell you they’re not necessarily interested in the textile industry. There’s a lot of textile facilities and equipment around this country that’s still on the market.”

Manufacturers seem less worried than other sectors about weak demand. But Davis says it varies from industry to industry, and it’s possible that manufacturers haven’t felt the full brunt of a sluggish economy. Through July, retail sales nationwide were running about 3% ahead of last year, but sales were flat May through July and slipped a bit from June to July. “It takes a while for decreasing demand at the retail end of the supply chain to work its way back to manufacturing.” Another big worry of Tar Heel executives is the lack of skilled workers. Baby boomers in management are getting older and think differently than younger workers, and an influx of Latino and women workers has forced managers to change how they relate to their employees, says Sharon Whittle, Grant Thornton’s Carolinas practice leader for compensation and benefits consulting. But the two biggest concerns of her clients are health-care expenses and retention of top-level talent in a down economy. “A lot of our clients are waking up and realizing that the strategies they had in place for their bonus or stock components of pay are not now aligned with their business strategy, because that’s changed as a result of the economy taking a downturn.”

Despite all the gloomy stats and scuttlebutt, most executives of companies on the list are optimistic about the Tar Heel economy. It’s cyclical after all, and so are demand, labor and credit flow, Davis says. When money is plentiful, a sense of euphoria takes hold and lenders compete to put it into borrowers’ hands. As recently as a year ago, he says, there were essentially no-covenant loans available at low rates. It might take a while, but the economy will work through its current troubles. “We always get back to the point where the banks have plenty of money to lend, and the other investors have plenty of money to lend, and we go back to euphoria.”

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